Like It or Not, Crowdfunding is Becoming a Real Thing – and Clients Want it

Late last year, CrowdStreet, a provider of direct-investment platforms for commercial real estate deals, launched what it said was the first investing platform of its kind for financial advisors.

In a press release published at the time, Portland, Ore.-based CrowdStreet said it was out to satisfy growing demand among FAs to be more responsive to their clients by giving them access to private equity investments in an era when investors – especially younger ones – expect “instant access to information about offerings” and advisors in turn need tools “to quickly distribute investment documents” to those investors.

In this light it would seem that crowdfunding for private equity — a centerpiece of the 2012 Jumpstart Our Business Startups, or JOBS, Act — has come of age.

But even though specialist investment firms – especially those with a real estate bent – are seeing more interest from accredited investors in direct investing through white-label online portals like CrowdStreet’s Sponsor Direct, other major private equity sectors show little interest in courting crowds to raise capital. And some mainstream FAs remain staunchly skeptical.

In this view, investors who believe the long bull run in stocks is fizzling out think getting in on private equity plays via crowdfunding could help them offset tepid gains from public markets through the next few years. While private equity has a reputation for outsized gains based on its participants' status as early movers, Blair, whose firm manages about $120 million, thinks democratized versions leave out much of what makes old-style PE investing so successful.

“I don’t think people” — and by “people” he means would-be crowdfund investors — “really appreciate the consequences of illiquidity,” says Blair, referring to the typical lockdown period of about five years when investors can’t get at their money. Nor do crowdfunding sponsors always understand that a main attraction of direct investing is “getting some semblance of a say in the entity” being funded — something that’s utterly lost to crowdfund entrants, he adds.

In line with his late-cycle thesis, Blair fears “people who invest in these opportunities will not be as successful as they hope.”

“People who invest in these opportunities will not be as successful as they hope.”Nate BlairPalo Alto Wealth Advisors

It’s also notable, says Blair, that crowdfunding hasn’t made itself felt in high-technology investing, an engine of spectacular returns for some. There, a glut of experienced investors and reputable sponsors keep mom-and-pop players — even accredited ones — firmly on the sidelines with little hope of a call-in.

Tore Steen, CEO of CrowdStreet, says that’s why most of the action in private equity crowdfunding is in real estate — and it’s why commercial RE is his firm’s exclusive focus. It’s the third-largest private equity segment, he says, and — unlike high tech — it has been in need of funding ever since regulators imposed more stringent lending rules on banks in the wake of the recession 10 years ago. In fact, addressing the need for more startup funding was the main reason Congress greenlighted crowdfunding with the JOBS Act in 2012.

For Steen, who co-founded CrowdStreet in 2013, the JOBS Act is delivering on its promise. “I think it’s tracking to what realistically can happen” when such innovations occur, he tells FA-IQ. Though crowdfunding only accounts for 1% or 2% of the private equity money in commercial real estate, he reckons that’s just about where all of e-commerce stood relative to the whole market in the late 1990s — giving crowdfunding plenty of scope for growth in coming decades.

In fact e-commerce retail sales went from a bit under 1% of total sales in 2000 to over 9% as of February 2018, according to the Federal Reserve Bank of St. Louis.

From the investor’s standpoint, there’s more to JOBS Act investing than potential returns, says Todd Smurl of the Consilium Multifamily Opportunity Fund, a Houston firm that buys, renovates and sells big apartment complexes and is seeking crowdfunding from accredited investors. For investors who want some real estate participation — and can stomach not having cash access to a portion of their overall portfolio for a period of up to seven years — crowdfunding can offer better tax treatment than REITs, adds the former Goldman Sachs wealth manager.

Ideally, says Smurl, investors would limit their crowdfund investing to 5% to 15% of their overall portfolios, in line with any alternative gambit.

Intellectus Partners, a Silicon Valley-based RIA with $763 million under management, just hired risk and derivatives expert Trevor Mottl. In addition to helping Intellectus clients gauge optimization strategies, derivatives, risk management and cryptocurrencies, he’ll work with them to assess private investments, including crowdfunding opportunities, says the firm’s CEO David La Placa.

David La Placa

For La Placa, rules and regulations set up “with every good intention” in the wake of the tech meltdown in 2000 have “made it harder to get access to real wealth-creating opportunities.” And, he says, investors are very aware that marquee IPOs come to market these days “with all the juice squeezed out.”

By engaging Mottl to turn over more rocks, the firm hopes to give clients a broader but no less informed choice of investment approaches, La Placa tells FA-IQ. “As wealth managers dedicated to helping our clients create and preserve wealth, we have to have open minds and the ability to evaluate more complicated opportunities, including crowdfunding,” he adds.

Given the newness of crowdfunding, advisor Steve Branton of San Francisco-based Mosaic Financial Partners takes a similar stance, even if he couches it in warier terms.

“We consider it a speculative investment, so it’s relevant to have a discussion as to whether or not this sort of investment is appropriate for each individual client,” Branton, whose employer manages $623 million, tells FA-IQ. “Usually this discussion involves their personal tolerance for risk, their capacity for loss of the investment and the effect of a potential loss on their other long-term goals.”